Oct. 17 (Bloomberg) -- Bank of America Corp., the second-biggest U.S. lender by assets, reported that third-quarter
profit was almost entirely consumed by litigation expenses and
an accounting charge.

Net income fell 95 percent to $340 million, breaking even
on a per-share basis, from $6.2 billion, or 56 cents, a year
earlier, according to a company statement today. Analysts,
including David Trone of JMP Securities LLC and Ed Najarian of
International Strategy & Investment Group Inc., said operating
results beat their estimates, and the bank reported capital
levels improved.

Chief Executive Officer Brian T. Moynihan, who took over in
2010, has approved more than $28 billion for settlements of
legal and regulatory claims tied to his predecessor’s takeovers
of Countrywide Financial Corp. and Merrill Lynch & Co. Last
month, he agreed to pay $2.4 billion to investors who said
management hid Merrill losses ahead of the 2009 deal.

“If you could clean up the litigation, it’s actually a
good story,” said Chris Whalen, a senior managing director at
Tangent Capital Partners LLC, on Bloomberg Television. “They
would be very competitive with Wells Fargo.”

Revenue at the Charlotte, North Carolina-based firm dropped
28 percent to $20.4 billion before adjustments, and was little
changed after excluding accounting charges tied to debt. The
quarter’s results were aided by a 48 percent drop in provisions
for credit losses to $1.77 billion from a year earlier.

Dividend Outlook

“Our strategy is taking hold even as we work through a
challenging economy and continue to clean up legacy issues,”
Moynihan, 53, said in today’s statement. The stock dropped
2 cents to $9.44 at 4 p.m. in New York.

The firm continued to improve capital levels used by
regulators to judge its strength ahead of stricter international
rules. The Tier 1 common capital ratio reached almost 9 percent
at Sept. 30, from about 8 percent at June 30, the bank said.

That’s enough to run the company and support growth, and
the bank will soon begin preparing its next capital plan for
regulators, Moynihan said today when asked about the dividend
outlook during a conference call with analysts. The capital plan
helps determine whether a lender gets permission to boost
dividends or stock buybacks.

Bank of America cut its quarterly payout to 1 cent a share
during the financial crisis when it received a $45 billion U.S.
bailout, which was repaid almost three years ago, and investors
have been pressing Moynihan for an increase.

Dividend Outlook

The Tier 1 ratio exceeded levels of JPMorgan Chase & Co.
and Citigroup Inc., Najarian said today in a research note. The
possibility of a dividend increase or share repurchases next
year became “much better” after Bank of America’s balance
sheet repair, he wrote.

Return on average equity, a measure of how efficiently a
company reinvests shareholder funds, was 9.47 percent in the
quarter, compared to 8.69 percent in the second quarter and 12.6
percent a year earlier. The firm’s return on average assets was
0.06 percent in the quarter, compared with 0.45 in the second
quarter and 1.07 percent a year earlier. Banks typically set a
target of 1 percent or greater for ROA.

After preferred dividends, Bank of America showed a net
loss for the quarter of $33 million, according to today’s
statement. In home mortgages, losses could be as much as $6
billion above reserves on demands that the firm repurchase
shoddy loans, compared with previous guidance of $5 billion for
a smaller set of demands. The bank was able to reach the
projection “as the result of continued dialogue” with Fannie
Mae and Freddie Mac.

Consumer Bank

Net income for consumer and business banking was $1.3
billion, down $379 million, even as average deposits rose 3
percent. The bank reported sales and trading revenue increased
to $3.2 billion from $1.3 billion a year earlier excluding the
impact of debt-valuation adjustments, and was little changed
from the second quarter. Mortgage originations increased 18
percent, the company said, with consumer real estate narrowing
its net loss to $877 million from $1.1 billion.

The U.S. housing market is starting to improve with prices
moving “in the right direction,” Chief Financial Officer Bruce
Thompson said today. “We’ve clearly begun to turn a corner,”
he told reporters on a conference call.

Bank of America set aside part of the cost of the Merrill
deal in advance and incurred more legal expenses during the
quarter. The company denied misleading investors over Merrill’s
health and said resolving the class-action suit was in the best
interests of current shareholders.

Debt Accounting

Accounting rules can require companies to book losses when
the market price of their bonds increases or a profit when the
price falls, reflecting the hypothetical cost to repurchase and
extinguish the debt.

Analysts often discount such adjustments because the cost
remains theoretical unless the company conducts a buyback. Bank
of America has been on a campaign to reduce interest costs since
last year, cutting long-term debt by more than $120 billion in
the 12 months ended June 30 through redemptions and by not
replacing debt that matures.

The debt-accounting charges are a reversal from last year’s
third quarter, when Bank of America booked more than $6 billion
in gains as its credit deteriorated and concern swirled that its
capital might not be adequate.

The bank’s stock plunged almost 60 percent in 2011, dipping
below $5 in December for the first time since 2009. The shares
have led the Dow Jones Industrial Average this year with a gain
that reached 70 percent this week as Moynihan boosted capital
and the U.S. recovery strengthened.

Expense Cuts

Moynihan has vowed to cut $8 billion in annual expenses and
more than 30,000 jobs. The bank shrank the number of full-time
employees 5.6 percent to 272,594 in 12 months.

The CEO sold more than $50 billion in assets since taking
over in 2010 from Kenneth D. Lewis, who announced his retirement
after clashing with investors and regulators over the Merrill
Lynch deal, which threatened the firm’s stability.

Bank of America scaled back its mortgage business after the
2008 takeover of Countrywide saddled it with more than $40
billion in costs from faulty mortgages and foreclosures. The
bank became the biggest U.S. mortgage lender after the
acquisition, then slipped to No. 4 and had about 4.4 percent of
the U.S. market this year, compared with 33 percent for Wells
Fargo and 11 percent for JPMorgan, according to industry
newsletter Inside Mortgage Finance.

Home Equity

Banks face tougher rules on how to account for home-equity
mortgages to troubled customers. Thomas Curry, who took over the
U.S. Office of the Comptroller of the Currency in March, is
pushing lenders for write-offs when borrowers go bankrupt, even
if payments on the home loans are current.

Bank of America said it charged off $478 million of those
overdue loans, according to a presentation, most of it tied to
home-equity loans. The new guidance also cost JPMorgan,
Citigroup and Wells Fargo about $2 billion of write-offs in
their third-quarter earnings reports.

Separately, Bank of America said today it had wiped away
about $4.8 billion in debt from homeowner’s primary mortgages
under an industry settlement of state and federal probes into
shoddy foreclosure practices.

Principal Reductions

Participants saw an average reduction of more than $150,000
on first-lien mortgage principal, and 30,000 homeowners were
either approved or had moved into permanent modifications by
Sept. 30, the lender said today in a statement.

The figures show that Bank of America, which rescued
Countrywide in 2008, has ramped up assistance efforts under the
$25 billion industry settlement. The bank had been criticized by
some housing advocates for not completing any first-lien
modifications as of June 30 in the earliest report of lender
progress under the deal, which was announced in February.

The assistance puts the lender “well on the way” to
meeting its required $7.6 billion in consumer relief within the
first year of the settlement, the company said. That relief
includes modifications of primary mortgages and home equity
loans, as well as other options such as incentives for short
sales, the company said.